Contrarian Investing: Can Potbelly Slim Down Your Portfolio?

Potbelly Corp. (NASDAQ:PBPB) is a new publicly traded company that operates fast-food sandwich restaurants in the mid-western United States. The company came out on Thursday and announced lousy second-quarter earnings projections, and the stock promptly lost nearly a quarter of its value. Since its IPO, the shares are down by nearly two-thirds, and it seems that there is only one direction for the stock — straight down. But could all of this negativity be providing contrarian investors with a buying opportunity?

If we look at the company’s earnings figures (and note that they aren’t yet official) we see that the main problem is that revenue is growing at a slower pace than expected. Q2 revenue grew by 6.9 percent over revenue from the second-quarter of 2013 from $78.2 million to $83.6 million. This doesn’t look so bad considering that the company had been growing its sales in the high single-digits in the recent past. However, analysts were expecting more considering the company’s recent IPO and capital raise.

But what was really disappointing was same store sales growth. The actual figure grew by 1.6 percent — too small for a growth company — but due to the timing of the Easter holiday, it makes more sense to compare numbers without shifting the holiday weekend from the first to the second-quarter, and in that scenario same-store sales growth actually fell by 0.9 percent. This is completely unacceptable for a growth company, and I think it is for this reason, along with the general bearish stance of the market with respect to this stock, that we saw such a precipitous decline in the shares on Thursday.

Nevertheless, we have seen time and time again scenarios in which companies have flopped after going public because expectations were so high, only to bounce back and make money for the contrarian investors who got in at the bottom. If you think this is going to play out for Potbelly, then this is probably the right time to get in.